The Offshore World

1
The Offshore World

• International Political Economy II
• Lecture 9

2
Themes

• Offshore World
• Euromarkets
• Tax havens
• State
• Sovereignty
• Globalisation

3
Outline

• - Definition? Pirate Radio
• - The emergence of a global financial system
• Context
• Catalyst
• Merchant Banks
• The Innovation
• Impact
• - Tax Havens
• A Competitive Strategy
• Lichtenstein
• Offshore and Global Corporations
• US Direct Foreign Investment
• Investment into China
• Monoline (bond/debt) Insurers
• Sovereignty
• Globalisation
• Definition

4
What is offshore?
5
Part One

• The Emergence of a Global Financial System

6
Offshore and the Creation of a Global Financial
System

• Intermediating between savers and borrowers
• Mechanisms banks, bonds, shares, loans etc
• Developed from local markets to national markets
  during late 19th century
• Developed into a global market from the 1970s

7
Origins of the Euromarket 1The Post War Context

• Events that took place in September 1957, City of
  London
• After WWII, the British government, the Bank of
  England and also U.S. government wanted to
  restore Citys position
• Maintain a Sterling block -- less pressure on
  dollar
• Convertibility of sterling
• Maintain open bond market
• The pound is under pressure on many occasions in
  the early 1950s
• City and Bank of England wish to maintain the
  value of pounds and convertibility
• Citys policy to raise interest rates
• Treasurys response to slow down domestic lending

8
Origins of the Euromarket 2The Catalyst

• Major crisis in August 1956 due to the Suez Canal
  crisis
• The Bank opposes devaluation of
• Rumours that West Germany was going to revalue
  the D Mark and Britain devalue sterling, added
  further to sterling's problems
• Crisis worsens in 1957
• On 19 September Bank rate was raised from 5 to
  7
• On 20 September the Bank, on the Treasury's
  orders, announced a ban on refinancing credits
  and sterling credits to finance non-sterling
  trade
• Within a week the ban is evaded Evidence for the
  birth of the offshore market or Euromarket

9
Origins of the Euromarket 3The Merchant Banks

• Ban of re-financing to non-sterling area
• This latter measure had the direct effect of
  cutting off the source of funding by which
  British merchant and overseas banks conducted a
  considerable amount of business.
• This posed a problem for the merchant banks, as
  they had traditionally relied on acceptance
  credits in sterling, historically known as the
  'London Bill' to fund international trade.
• Even as late as 1959 sterling still financed
  around 40 of world trade.
• Yet the merchant banks were small,
  under-capitalised and unable to call directly on
  the cheap deposit base of the clearing banks.
• City merchant banks began bidding for ex-patriot
  dollars, which they then lent-on in the course of
  their international business.
• Lending these to non-residents.

10
The Innovation

• Eurodollar market in effect provides City with
  a "way back" into business, allowing it to
  continue to act as a centre for international
  finance without imposing a strain on Britain's
  depleted gold and exchange reserves.
• Yet, with these dollar deposits not needing,
  necessarily, to be swapped into sterling, (or any
  other currency), before being traded and, hence,
  not coming under exchange control regulations,
  what marked the start of the City's role as an
  entrepot centre, also heralded the beginning of
  the offshore Euro-dollar market proper.
• Effectively a new loophole was established
• If a British bank intermediates between two
  non-residents in non-sterling currency, the
  transaction is not regulated by the Bank of
  England
• Transaction is not regulated by anyone Offshore

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Impact

• The Globalisation of the Financial system
• 1957 marks shift from one directed towards the
  furtherance of distinct national regimes of
  accumulation, based on a system that was almost
  wholly regulated, to one that is today mostly
  responsive to the demands of global speculation
  and almost wholly unregulated
• re-establishing the hegemony of the international
  financial market over states economic
  sovereignty, and in the process undermining their
  ability to govern

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International Financial Centres 2000

• United Kingdom
• Japan (Including the Japanese offshore
  Market)
• Germany
• United States (Including International Banking
  Facilities)
• Cayman Islands
• Switzerland
• France
• Luxembourg
• Honk Kong
• Singapore (Including Asian Currency Market)
• Netherlands
• Belgium
• Bahamas
• Source BIS

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Part Two Tax havens
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A Successful Competitive Strategy?GDP Per Capita

• 1 Luxembourg 62,700 2005 est. welfare/tax
  havens
• 2 Equatorial Guinea 50,200 2005 est. tax
  haven
• 3 Norway 42,400 2005 est. welfare
• 4 United States 41,800 2005 est. Anglo-Saxon
• 5 Guernsey 40,000 2003 est. tax haven
• 6 Jersey 40,000 2003 est. tax haven
• 7 British Virgin Isl. 38,500 2004 est.
  tax haven
• 8 Hong Kong 36,800 2005 est. tax/developmental
  
• 9 Bermuda 36,000 2003 est. tax haven
• 10 Switzerland 35,000 2005 est. welfare/tax
• 11 Iceland 34,600 2005 est. welfare
• 12 San Marino 34,600 2001 est. tax haven
• 13 Ireland 34,100 2005 est. tax/welfare
• 14 Denmark 33,500 2005 est. welfare
• 15 Austria 32,900 2005 est. tax/welfare
• 16 Canada 32,800 2005 est. welfare/anglo
• 17 Cayman Islands 32,300 2004 est. tax haven
• 18 Australia 32,000 2005 est. anglo

15
Lichtenstein 2008

• Leona Helmsley 1989 wealthy New York heiress and
  businesswoman reported by her housekeeper to have
  said We dont pay tax. Only the little people
  pay taxes.
• The Collective Action Problem
• The Sovereignty Conundrum
• The Governance Paradox

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Multinationals investment into tax havens
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U.S. Direct Investment Abroad, 2004

• 1. United Kingdom 22,926 mn part offshore
• 2. Canada 22,441
• 3. Netherlands 12,598 part offshore
• 4. Japan 10,690 part offshore
• 5. Ireland 10,449 part offshore
• 6. Switzerland 10,602 part offshore
• 7. Germany 9,956
• 8. France 9,757
• 9. Mexico 7,424
• 10. UK Islands, Carribean 5.062 tax haven
• 11. Bermuda 4,764 tax haven
• 12. Luxembourg 4,533 tax haven
• 13. China 4,228
• 14. Korea 3,768
• 15. Italy 3,477
• (Bureau of Economic Analysis www.bea.gov/bea/di/
  usdiacap.htm2004

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Top regions/Territories Investing in China 2002

• millions
• Hong Kong 12,826 offshore
• Virgin Islands 4,489 Tax haven
• U.S. 3,952 part offshore
• Japan 3,195 part offshore
• Taiwan 2,829
• South Korea 2,074
• Britain 1,042 offshore
• Germany 901
• Cayman Islands 868 Tax haven
• Source China monthly statistics, December 2002

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The Worlds Leading Capital insurance centres 2001

• 1 Bermuda 1,405
• 2. Caymans 535
• 3. Vermont 527
• 4. Guernsey 300
• 5. British Virgin Islands 129 (1997)
• It is estimated that there were 4, 458 captive
  insurance companies worldwide.

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Sovereignty

• Divisible
• Subject to commodification.
• Fictitious sovereignty
• Sovereignty as the selective application and
  withdrawal of authority to redraw a regulatory
  landscape in the face of competitive forces

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Offshore and Globalisation

• Held et al. (1999) coin term Hyperglobalisation
  thesis state no longer can effectively make
  public policy in face of transversal forces of
  globalised economy e.g. Ohmae 1995
• But relies on zero sum conception of state and
  market
• So not the retreat of the state, but a long term
  on-going process of state adaptation (Cerny
  19991 Cohen 2001 Palan 2003, Picciotto 1999)

22
So, a definition?

• Very difficult to define tax havens
• Tax havens are countries with
• little or no income or corporate tax,
• strong bank secrecy laws
• good telecommunication links with global markets
  and
• Public presentation as a tax haven